The next generation of high-speed internet connectivity, known as 5G, will be rolling out soon and represents a fundamental transformation of an operator’s network. Several companies are looking to ride the 5G Wave and establish their dominance early on. Nokia Corporation (NYSE:NOK) is one of the most prominent players in the 5G realm and Nokia stock will benefit from its increased adoption.
It now primarily focuses on being a network-provider and offering related infrastructure and services. Let’s have a look at what the company has been doing recently and how it has reversed its fortunes off late.
There was a time where Nokia dominated the smartphone market and was responsible for more than one-third of smartphone sales worldwide. However, all that changed when Apple launched the iPhone, and Google subsequently released the Android operating systems for phones, which were later adopted by Samsung, HTC (OTCMKTS:HTCXF), and others. From trading at $62.5 in 2006, it has now tanked to $4.12 per share.
Since 2014 though, the company has a revamped outlook and has shifted its focus towards three core areas, including networks, navigation, and technologies. Under the leadership of former chief executive and president, Rajeev Suri, Nokia grew its revenues by 54% from 2014 to 2019.
It acquired Alcatel-Lucent in 2015, which enabled it to become one of the three major global mobile equipment manufacturers.
Not much has changed now as the company continues to develop its competencies in the aforementioned areas. Most recently, it has been making waves in IP routing, software, and optics winning contracts for the provision of the data center networks to interconnect the networks for Tencent (OTCMKTS:TCEHY) and Baidu (NASDAQ:BIDU) are a recent example.
The 5G Wave and Nokia Stock
Nokia and its competitors in Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) and Huawei are in a prime position in the Chinese 5G market and currently represent 25% of the total 5G Radio Access Networks (RAN).
5G will power the inventions of tomorrow, including the Internet of Things (IoT), AI, and others. However, more significantly, in the short run, it will result in the growth of mobile broadband users.
Nokia is likely to benefit from the Wave by providing the infrastructure needed for the effective deployment of 5G. Specifically, the company specializes in the development of RAN’s, which is a market that is expected to grow at an 11.3% CAGR from 2019-2026. Moreover, Nokia can also increase its revenues from licensing. It accounted for over $1.5 billion in 2019 and could grow significantly as it expands into the Chinese market.
However, investments in 5G are reducing operating margins due to the higher sales costs. Nokia has already deployed a new system called Reefshark, which effectively reduces energy consumption on the ground stations improving throughput considerably. Deployment has been stalled though in various parts of the world due to the novel coronavirus pandemic and supply chain constraints are likely to surface in the near term. I expect the impact of 5G revenues to impact Nokia’s financials in 2021 and beyond.
Naturally, there are several challenges that Nokia in its quest to return to its financial positioning from over a decade ago. The first and foremost risk pertains to the increase in the competition amongst the players in the 5G industry.
Supply constraints could potentially differ revenue materialization until next year. Nokia has secured some solid deals with China, but political tensions between the East and West could hamper revenue growth significantly.
Nokia stock has also been on a downward slump since suspending its dividend last year. It has yet to return to the $5.11 per share level it was trading at before the announcing the cut. However, I expect the stock to gain handsomely once the coronavirus storm fades away, and we get to enter the 5G era with full force.
Bottom Line on Nokia Stock
Nokia has recovered extremely well from the debacle of its smartphone business in 2007. It has now evolved into one of the world’s largest network providers and is expanding its market share in networks, navigation, and technologies.
It is in pole position to rake in the benefits of the widely anticipated 5G launch. We will feel the full impact of 5G on Nokia’s revenues next year, and I expect it to increase its share price substantially. Therefore, now is an excellent time to grab the stock at a bargain and derive the benefits of the increased share price in the near future.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.